NetEase, Inc.
Q4 2012 Earnings Call Transcript

Published: 7 Feb 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the NetEase, Incorporated Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today. And I would now like to turn the conference over to Brandi Piacente. Please go ahead.

[Brandi Piacente:]

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and in this discussion. A general discussion of the risk factors that could affect NetEase’s business and financial results is included in certain filings of the company with the SEC, Securities and Exchange Commission, including its annual report on Form 20-F. The company does not undertake any obligation to update its forward-looking information, except as required by law. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on the NetEase corporate website at ir.netease.com. I will now turn the conference over to Mr. Onward Choi, Acting Chief Financial Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase.

[Onward Choi:]

Thank you, Brandi. Before I begin, please note that for the purposes of this discussion, all percentages are based on renminbi. 2012 was another strong year for our company with growth across our online games, portal and e-mail businesses. Throughout the year, we introduced enhancements to our online services and game offerings. That’s why as deliver newer services, content and games to the markets that build on our successful online platforms. Our popular services and games continued to gain favor with the online community, and our business continues to price. In 2012, we increased our total revenues by 12.1% to RMB8.4 billion led by the outstanding performance of our self-developed games and growth from our advertising services business. We would like to note that, we are very pleased with our year-over-year growth and financial results from our self-developed games business in 2012. Remarkable growth from our self-developed games drove 11.2% increase in online game revenues during 2012. Our flagship games continued to demonstrate encouraging performance and growth. Some of our highest performing games for the year included Fantasy Westward Journey, and Westward Journey Online II which both reached record high PCU level in August, with Westward Journey Online II celebrating its 10 year anniversary in 2012. Ghost and Tianxia III also delivered solid performances during the year. Our newest games, Kung fu Master and Heroes of Tang Dynasty II also received positive feedback and contributed to our increase in annual online game revenues. We’ve finished the year with solid fourth quarter total revenues of RMB2.3 billion representing 8.3% growth year-over-year and a 13.8% increase quarter-over-quarter. Online game revenues for the fourth quarter increased 13.6% quarter-over-quarter driven primarily by our self-developed games, including our three newest games Kung Fu Master, Soul of the Fighter and Heroes of Tang Dynasty II as well as the launch of Blizzard Entertainment’s World of Warcraft

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Richard Ji from Morgan Stanley. Please go ahead.

[Richard Ji:]

Hi, William, Onward. Good morning, and happy Chinese New Year in advance and also congrats on the solid quarter. I have two questions. And first of all, let me start with English then I will translate. And your new games have been performing well and including Ghost, Kung Fu Master and Soul of the Fighter and we understand that you usually you don’t disclose the revenue breakdown of those games. But can help us to understand a little better about their growth rate relative to the levels for that your legacy games. And also, can you comment on the performance of these new games relative to your own expectation?

[William Ding:]

(Interpreted) So, basically we have highlighted with respect to Richard’s question is that from the company’s perspective we are quite satisfied with the new games growth and developments and in particular for games like the Kung Fu Master, which has been developed in the markets by the companies for six years to seven years. The performance of the game so far in the market has been encouraging and the companies would be more than willing to invest more resources to further develop the games into the market as well. And as for the other games like Ghost, it has also been performing well and we are also very satisfied with its performance so far. And stepping into 2013, the company would also rollout more new games initiatives into new game areas and some of the games that we will be using will be taking a new theme, like the 2.5D MMORPG to Tibetan mythologies game that we are going to roll out, which is called the Legend of Tibet. And so, I think we are looking forward to the new game development in this year. Thank you.

[Richard Ji:]

Thank you. My second question is regarding your mobile Internet initiative and you have deployed some very popular mobile apps, such as NetEase Mobile News and Youdao et cetera. And so, for 2013, can you comment on your money titration plan as well as your mobile gaming strategy?

[William Ding:]

(Interpreted). Okay. So, basically with regards to the company’s treasuries in terms of the mobile internet area, the companies will focus very much on this treasuries in exploding our mobile internet businesses. And in 2013, we will also increase our efforts to rollout full array of our mobile applications in different areas. And so far, I think other than the Mobile News, the Youdao Dictionary applications that has been in the markets for some time, we have also been able to rollout some other popular applications like the Youdao Cloudnote, the News Read and also the Cloud Music. And other than those applications kinds of stop, we would also look forward into the both of these areas and we believe that everyone would got a better sense on how NetEase would position ourself in this area especially in 2013. Thank you.

[Richard Ji:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Wallace Cheung with Credit Suisse. Please go ahead.

[Wallace Cheung:]

Hi. Thank you. Congratulations on very good results William and Onward. Let me just quickly ask a question in Chinese and then I’ll translate back in English. My questions firstly, what is the growth of the existing two – major two games in 2013 and the other question is in terms of revenue contribution from the non-portal business of NetEase. Thank you.

[Onward Choi:]

(Interpreted). So with regard to one of the first questions, I think with regards to the online game business growth and performance for NetEase, I think the focus should not be permanently on our legacy games like the Fantasy of Westward Journey, or Westward Journey Online II. In fact for the companies in the last five years, we have also made other achievements or rollout some of the new initiatives in by rolling out some of the new game channels in the markets like Tianxia III, Ghost, Heroes of Tang Dynasty II, Kung Fu Master and all of those new games has also been experienced some very successful launch, a good user receptions and perceptions and we also see that those new games has also contributed a good result that can be reflected in our financials. And with regards of our Wallace’s questions on the revenue contributions on our other non-portal businesses. I think for NetEase we are very focused on our user experiences and especially into mobile Internet areas, we have also rollout some new initiatives, like the News the news reader that they user rate the movie tickets applications and many other things. We also see that those initiatives would mainly to improve the user experiences and to also able to establish a platform to enable to people to get the information more timely. And in terms of revenue contribution, we do see that in the soft time, it would not be contributing too much revenue to our overall businesses, but the more important point is that, we’ll try to improve the user experiences and also to fill a good user base from there. And then, we will see how we further develop the businesses going forward.

[Wallace Cheung:]

(Interpreted) So, what is the plan for the new expansion pack launch for the Fantasy Westward Journey and Westward Journey Online II? Thank you.

[Onward Choi:]

(Interpreted). Maybe I can also have some rough estimations based on the company’s current expectations, because usually for those legacy games, the rollout of the new expansion packs would be somewhere around in the second half – the second quarter to fourth quarters of the year. But usually we would some announcements before the rollouts of those expansion packs. And so, you can do these kind of estimations for now.

[Wallace Cheung:]

(Interpreted). Thank you.

[Operator:]

Thank you. And our next question comes from the line of Dick Wei from JP Morgan. Please go ahead.

[Dick Wei:]

Hi. Congratulations for another strong quarter. So, I have two questions. First question is I think the last quarter World of Warcraft and Tianxia III has very good growth. I wonder if you can comment on this quarter and the first quarter what is the momentum for the two games. And other second question is on gross margin. What are the key reasons for gross margin increase or what’s the main reason if the gain mix moving more towards the in-house developed games?

[William Ding:]

(Interpreted). This is William. Well, with regard to this first question. First of all for Tianxia III, this one is NetEase self-developed 3D MMORPG games adopting guide in base model and from all the time we have enhanced its contents and user experiences with lots of advancement in cost, in terms of R&D. And we will upkeep those efforts in order to improve the product itself in order to make it going well in the market and excel in the industry. And for the World of Warcraft, I think basically the launch of the portal with some China elements was in October and the initial feedback has been very good though and we do looking forward that in the upcoming periods, there would be more regular launch of new elements or expansion packs or new game play in order to enrich the user experiences for the World of Warcraft. And with regard to Dick’s second question about the gross margins increase for the game businesses, I think it is quite rightly in saying that it is mainly a result of the change in the game mix that we have got a higher portion of the revenues coming from self-developed games.

[Dick Wei:]

Great. Thank you, Onward sharing your view.

[Onward Choi:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of Alicia Yap from Barclays Capital. Please go ahead.

[Alicia Yap:]

Good morning William, Onward and Brandi. Thanks for taking my questions. My first question is regarding mobile games market. So wonder that if William can share his view on the mobile games market potential in China. And if this year whether we will see the inflection points for mobile games to take off more meaningfully for many games company. And for your own mobile game strategy just can you comment whether it will be more on those like charge per download or on the original item selling model? Thank you.

[William Ding:]

(Interpreted). So, basically William says about the mobile game markets potential is that we also holds a positive view about this part of the game market and we also advertise the importance of further expanding into this area. And for this year we will also put in more efforts in terms of researching and developing new initiatives. But of course, it would also take some time and but we would look forward to it.

[Alicia Yap:]

Thank you. And my second question

[William Ding:]

(Interpreted). Okay. So – and thanks. Also one supplement that William would also like to share about his will on the mobile game market developments. Basically we’ll also see quite a lot of successful experiences in countries like the Korea, Japan, U.S. and also Europe. And basically for the mobile games development in terms of the development requirement, it is must easier to do so. And given the path for NetEase, we have been cumulated quite a lot of valuable experience in the game development areas. And so, we’ll look forward that we will be able to work out something meaningful in the upcoming future.

[Alicia Yap:]

I see. Thank you for the very detailed answer. Can I just follow-up on and can William share his view that whether on the mobile games take off, will there be any cannibalizations on the user traffic or how the revenue performance for the existing MMO games in the future?

[William Ding:]

(Interpreted). Okay. So basically, we do not view that the roll out of any mobile games would have cannibalization issues on our user base for the client base games.

[Alicia Yap:]

Great. Thank you so much.

[Operator:]

Thank you. And our next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

[Eddie Leung:]

Good morning, William and Onward. Thank you for taking my questions. Two questions. The first one is about your game releases. Could you share with us, your plans on licensing fees for this year? And then, secondly about your portal business. Do you expect desktop traffic growth would be fairly slow or even stopped this year and if so, what’s the plan to handle this change? Thank you.

[William Ding:]

(Interpreted). So with regard to Eddie’s first question about the company’s plan for licensing games in this year. I think basically, the companies would be up holding an over that it deals with and if we could actually identify some good products in any markets with the good contest and good and reasonable price. I think we will actively considering all this kind of initiatives and to consider licensing those new games. And for the second question about the potential impact on the desktop traffic growth. I think basically, I think so we will use that, there wouldn’t be any big changes to the desktop traffic even though we have made much more efforts in rolling out more mobile initiatives, say for example, for our desktop initiatives we have very good products, which is sustainable to the users and through so many periods of time, we have also enhanced and increased our user experiences by rolling out some new products and the latest one like the user rate is also one of those that can also enhance the user experiences. And at the same time, while the – what we view about the mobile Internet development is that it is not replacing what we apparently doing on the desktop – on our existing portal, but rather we would consider it as an extension and supplement to our existing portal business strategies. And maybe the initial roll out of the mobile initiatives would cause some impact to the desktop profit or so, but in the long-term, we do see that those two platforms or those two initiatives would be quite complimentary product and replacing one to the other. So, basically other things that William would like to supplement is that in this year I think for NetEase we would further increase our investments in terms of the content delivery and one of the initiatives that we have likely rollout is the music, the Cloud Music and we do see that we would try to make this available to both the users on the mobile platforms as well as on the PC platforms. And this is also a very good application by itself to share some good music with the users on this applications. And at the same time we would also do more meaningful stuff on our news reading products by having more independent writers to contribute stuff on this platforms in order to enhance the reading or the user experiences as such. And in fact for this year for NetEase, we would also upkeep our commitments to invest more to buy and more good qualities content like the both, the online videos and things like that. And one more points that we would like to supplement is that we also got our open educations applications which is available on both the PC and also the mobile platforms.

[Eddie Leung:]

Got it. Thank you.

[Operator:]

Thank you. And that’s all the time we have for questions. I would now like to turn the conference back over to the speaker for closing comments.

[Brandi Piacente:]

Thank you, once again for joining us today. Please feel free to contact Cassia Curran, NetEase’s IR Manager, based in Hangzhou or the Piacente Group Investor Relations if you have further questions. Have a wonderful day, and Happy New Year.

[Operator:]

Ladies and gentlemen, this does conclude our conference for today. This conference will be available for replay until February 21, 2013 until – at midnight. You may access the replay system at any time by dialing 1-800-406-7325, or international participants for 303-590-3030, enter the access code of 4588210#. We thank you for your participation. And at this time, you may now disconnect.